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Thursday, July 30, 2015

Linkedin is a company worth faily $5B today, that could one day hope to be worth $10B, if it performs perfectly. Its market value is near $30B.Continuation of my chronicaling the eventual collapse of LNKD's stock value. Previous entry

Linkedin results may seem to be better than expected, but are fundamentally poor and keep its continued path to collapse. The results surprisingly include lynda.com revenue.Results

Record loss of $68M. (even without ~$22-40M expense spike that might be optimistically attributable to lynda.com acquisition). This figure is after tax credits.

Continued growth deceleration to 33%.

Record low growth rates in its core hiring and premium subscriptions business (Extreme downward growth of 32% and 22% respectively), with a 7 quarter low growth rate in its ad business to 32%.

Record low corporate solutions customer growth rate of 33%.

Though last quarter's guidance did not clearly include Lynda.com performance, they have included it in sales results. $18M of sales are from Lynda.com, and so growth rate overall would have been under 30% without this inclusion.

$18M Lynda.com revenue is a sharp drop from its $45M Q1 revenue. Possibly partial quarter data, though unclear due to $24M loss attributable to lynda.

Sharp Record low growth rates in every geography except the US, and still year over year growth decline in the US (growth that includes lynda.com revenue)

Every cost category grew sharply faster than revenue.

Cost of revenue 42.8%

Sales and marketing 41.8%

R&D 47.2%

Administrative 75.3% (only partially non-recurring hope)

depreciation 76.8% (no excuse for alarming rate)

Stock based compensation 93%

In their fake EBITDA earnings, lynda.com operations lost the company ~$24M. "Much better than expected"

An increase of only $72k in deferred revenue compared to an average of $60M in last 2 quarters suggests more deterioration in its premium subscription business. Its unclear how $5-6M lynda.com deferred revenue balance from last quarter was incorporated.

International marketing solutions revenue was a nearly flat 3% growth. With very sharp growth declines in the other 2 segments internationally. Record lows in all 3 categories.

US growth was down in all 3 segments except for marketing solutions. Most of lynda.com's 18M revenue should be assumed to be in US talent solutions, and it would cause both it and premium subscriptions to have record low growth rates for 10th quarter in a row.

Guidance by manament

Lower full year revenue guidance (exluding 40M beat to this quarter's previously stated guidance). Despite the contributions they will be including from lynda.com, and despite raising those revenue expectations by $50M. It appears as though they lowered their core business guidance by $50M

Forecasted record loss of $112M, (before interest) and flat quarter over quarter fake-earnings, for Q3. Revenue Growth a record low of 32%. Next quarter will not include any "one-time" acquisition costs.

Forecast $318M loss for the full year (pre tax and interest), and record low growth rate of 33%..

$30M higher full year loss than they forecast last quarter.

Considering the $112M previous quarter forecasted loss for this quarter, and 31M lower operational loss than forecast, the additional forecasted operational loss for the full year is $61M higher loss than they forecast last quarter.

While Average revenue per user is slightly down, management is "very pleased that we can keep it near the record levels"

Deterioration (30% decline this quarter) in its display advertising business is expected to accelerate.

Full year share count will be 133M. Close to 10% yoy increase and 20% increase over 2012

The performance that linkedin is including in its results is much lower than I expected because the revenue they are including is lower than last year's revenue as a standalone company. They are turning a company that was losing $3-5M per quarter (including capitalized expenses) and making it lose $25M+ per quarter.

One serious explanation for why the loss would be so high is that they will pad advertising revenue from lynda.com ads? One of the synergies with the 2 companies may be to mask the core deterioration of linkedin's core business with revenue padding, but also loss growth. They appear to be forecasting extreme short term destruction of the lynda.com business (which did not look amazing from disclosed financials)

Negative operating cashflow less depreciation and stock compensation

Although its been negative in all but one of the last 5 quarters, the stockholder relevant cash flows were -$20M compared to -$2M last year. This included a benefit of $56M in higher accounts payable.

Comparison to last quarter
Linkedin slightly beat their guidance of 112M operating loss for this quarter (in part by having fewer accounting write downs than they expected). But their expected losses for the next 2 quarters have increased compared to last quarter, and from last Q4. Revenue expectations then did not include any lynda.com contributions. $61M higher expected loss for next 2 quarters than was expected last quarter.

Whatever moment of clarity let wall street zombies see $190 price last quarter should make them see a much lower price this quarter. Lynda.com integration is terrible. Linkedin's core business even without lynda is terrible.

The core problem with linkedin

Its just a poor advertising proposition compared to even Twitter. Worst than Yelp too just because visitors there are in buying mode. FB and Google are showing that they are the preferred advertising medium, and as internet saturation continues, they will be powerful competitive forces that contain LNKD's potential.

Its talent solutions business shows saturation, simply from the declining growth rates that are fully meeting management's expectations. The average revenue per user is fully expected by them to decrease due to this saturation.

Member and revenue expansion costs LNKD much more than the revenue generated. Having members that don't click ads means database records and links and other hardware. The cost of revenue(+depreciation) number per member is $0.447 this quarter. Up from $0.38 last year. Another way to look at these costs is that for 16M in new members, they spent $72.5M in new equipment. Over $4.50 per new member. Sales and marketing is also a very expensive function in their business compared to simple (automated) web advertisers.

To highlight the high costs of linkedin compared to other internet companies. Despite similar sales to AOL.com, linkedin has 4x the depreciation expense (mostly obsolete computers).

Its Even worse: revenue increase compared to sales, cost of revenue and depreciation
LNKD increased revenue by $178M over the same quarter last year. The increases in cost of revenue ($30M), Sales and Marketing ($77M) and depreciation ($21M) total $128M. Useful sales growth was thus $50M, and less than 10% growth over Q2-2014.

By contrast, AOL had over 10% sales growth in FY 2014, and accomplished this while decreasing cost of revenue, marketing, and depreciation, and so has even higher useful sales growth than linkedin.

Engagement and costs per engagement
Engagement was up this quarter compared to last year's. Pageviews per member 92 per quarter vs. 80 last year. Pageviews per monthly visitor, 120 per month vs 99. But cost of revenue(+depreciation) per 1000 pageviews $0.584 vs. $0.472. (cost per monthly user of ~$5.50) The cost per pageview grew at a higher rate (23.7%) than the engagement per monthly visitor. Its necessary to include depreciation in these costs, because web companies will buy/replace servers on an extremely regular basis. For reference, google's cost per engagement lowered this quarter.

Costs of revenue(+depreciation) $170M was $30M more than marketing solutions revenue. Last year's cost of revenue ($113) was "only" $7M more than marketing solutions revenue. For the whole year, 2014 had a net loss in this metric while 2012 and 2013 had a small surplus. The extreme acceleration of deficits on this metric seems irreversible, and is a clear sign of struggling for revenue.
Deficits in this area mean that marketing solutions revenue per 1000 pageviews is less than the costs: $0.481 revenue per 1000 page views. ($0.06 marketing solutions revenue per MAU per month)

Twitter by comparison has $0.55 per MAU per month in revenue. $0.50 of which is advertising. FB ARPU is $0.92 per month. $0.87 in advertising.

The bigger than core problem

Out of control stock based compensation, and diluted share growth. There is no reason to ever pay shareholders, and no reason to even be profitable if stock compensation can grow in unlimited bounds, or just faster than revenue.

Only $17M (based on next quarter's guidance) of stock based compensation appears to be a one time event related to acquisition.

More on the lynda.com acquisition

This was a bad purchase even if the operations could stay at low losses. Its unclear why they have to cost LNKD so much going forward, but they appear to be ripping out the core of the operations to having just bought a video library and some use for their advertising inventory. Also a pad for their deteriorating revenues.

I am not that optimistic in the potential for a video library to generate meaningful recurring revenue.

Price target lowered

There is no reason to increase the optimistically high $10B valuation for the company. ($75/share) If LNKD is lowering revenue forecasts at every increasing loss levels this year, that necessarily accompanies headwinds in future years. They will need to maintain or increase large losses in order to just maintain the current deterioration levels.

Reaching $10B seems less realistic than before. The only bright spot of US marketing solutions is a small fraction of its business, and there is an expectation that other platforms are just better, and if fighting for advertiser market share becomes more prevalent with internet saturation, LNKD will lose the fight or lose tons of money staying afloat.

Its unclear that lynda.com should have much if any positive value credited to the company.

At any rate the $10B optimism should be lowered to $9.5B optimism. $71.42 per share value, that could possibly returned to shareholders (in the far future)

Shareholder Performance Margin and TwitterSPM is a metric I use that determines what net income would have been with 0 R&D expenses, and expresses it as a percentage of sales. The number not only assumes generously that R&D spending is a reasonable use of company cash but the inverse (1 divided by) SPM ratio also tells us the multiple that every $ spent on R&D must return in increased lifetime revenue or cost cutting.

Compared to last quarter, LNKD's SPM deteriorated from 16.6% to 14.2%, SPM will keep going down as long as expenses rise quicker than revenue. This is complicated by some one time expenses, but this deterioration is large. Going from 6x required return on R&D to 7x.

I mention twitter because it loses so much money ($1.26 in expenses per dollar of revenue) that even if it did not spend anything on R&D, it would still have losses and thus negative SPM (every dollar it spends on R&D at current margins lead to losses no matter how much increased revenue it might create). But twitter's SPM is at least improving from -8.9% last quarter to - 1.4% this quarter.

Google, FB and Microsoft all have SPMs above 30%, and so their required revenue return on R&D would be only 3x. Which is approximately the ROI that allows for generally sustainable and profitable R&D.

Linkedin's higher forecasted loss for next quarter on increased sales, means that its SPM will decrease even further without any of this quarter's one time expenses. The one thing that SPM does not capture is the possibility that Sales and Marketing expenses can have long term sales benefits. What we can conclude from LNKD's results and near term forecasts is that past sales and marketing overspending has been grossly inneffective.